Why aren't business leaders getting the governance message?

Business and government leaders worry about a multitude of issues these days. Climate change, weapons of mass destruction, water scarcity, migration, and energy are the greatest threats we face, according to the 750 experts surveyed for the World Economic Forum’s Global Risk Report 2016. And at the WEF’s annual meeting in Davos this year, the sheer number of unsettled issues – the Middle East meltdown, the European Union’s future (particularly given the possibility of a British exit), America’s presidential election, the refugee crisis, China’s economic slowdown, oil prices, and more – was itself unsettling.

Source: Crowe Horwath

But consider this: None of the risks highlighted in the WEF report caused the recent spike in debt crises or the wave of scandals that engulfed – just in the last year – Volkswagen, Toshiba, Valeant, and FIFA. These developments (and many more) are rooted in a more pedestrian – and perennial – problem: the inability or refusal to recognize the need for course correction (including new management).

As anti-establishment parties and candidates gain ground with voters throughout Europe and in the United States, political leaders who continue to pursue a business-as-usual approach could find themselves looking for new jobs. And the same is true of business leaders: Activist investors are fed up and determined to force change, either with a hands-on approach or by voting with their feet and divesting from companies that don’t meet their criteria.

As Barbara Novick, a vice chair of BlackRock, noted on a panel on corporate governance and ethics at this year’s Davos gathering, her firm looks carefully at whether the boards of companies in which BlackRock invests include people who are engaged and asking hard questions consistently throughout the year.

And yet the heads of some of the world’s largest companies still seem to be in denial. I spent several hours last year with the chief executive and chair of a bank who thought it unfair that investors were planning to vote against him holding both posts. Though he agreed that having one person in both roles is, in principle, a bad idea, he insisted that he was the exception.

I had a similar conversation this year with someone who noted that most of his company’s board had served for upwards of 20 years, and that his company had just established an age limit of 80 for board members. More rapid turnover might work for other companies, he conceded; but, again, his company was somehow exceptional.

On the other hand, Hiroaki Nakanishi, CEO and Chairman of Hitachi, spoke eloquently to me about the importance of corporate governance and the changing demands that global companies faced. He noted the importance of having non-Japanese board members as Hitachi seeks to expand further internationally.

The problem is that those now speaking up for long-term investing, commitment to the community, and building companies that last are doing so over dinner, behind closed doors, or under the protection of the Chatham House Rule (which requires that reported statements remain unattributed to those who made them). Indeed, in the program for this year’s Davos meeting, the phrase “corporate governance” appeared just once (for the panel with Novick that I was on). The same was true for “board” and “boardroom,” while a search for “ethics” turned up sessions on medicine and biotech. “Governance” was primarily about political governance, and “stewardship” referred to the planet.

Many people are cynical about Davos – and they aren’t completely wrong. Years ago, it was because the meetings were so openly secretive (much like the way people perceive board meetings). Nowadays, the WEF webcasts many of its sessions, and the cynicism comes from the sense that what is being discussed is not what business and government leaders need to think about.

That’s not the WEF’s fault. Davos has extraordinary convening power and the ability to bring important issues to the fore, including LGBT issues this year. There is no reason it cannot also include issues like the pay gap between executives and labor, the impact of corporate decisions on communities and the environment, and the growing loss of trust toward business and government. What it can’t do is force CEOs, board directors, investors, and policymakers to speak about such issues openly and on the record.

It is easy for companies to see far-off risks that they cannot control. It is a lot harder, but a lot more important, for them to acknowledge the risks stemming from how they operate. And it is harder still to persuade those business leaders who do comprehend such risks to talk about them on a public stage. That reluctance to speak openly about how to restructure corporate governance in a way that improves stewardship places all of us at risk.